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Weekday Trader

Fade to Gray at Avid Technology

By

Tiernan Ray

June 11, 2008 11:59 p.m. ET

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NOT EVERY "ACTIVIST" INVESTMENT fairytale has a happy ending.

At video-editing pioneer
Avid Technology
(ticker: AVID), the story has gotten gloomier since the arrival two years ago of activist investor Blum Capital Partners, which has increased its stake in the company from 6.4% in April of 2006 to 22% currently, making it the single biggest holder of the stock.

Avid shares have lost half their value in that time, even as John Park, a partner at Blum Capital, took a seat on the board of directors.

There may be further downside for Avid from a recent closing price of $19.63, as investors await the results of a restructuring project whose initial findings may be released next month.

Fact is, it's difficult to see what turnaround can be engineered at the 21-year-old company.

Avid's grip on the video-editing and post-production technology field has been loosened dramatically by
Apple
(AAPL), which swooped in with low-priced offerings that have increasingly gained adoption among independent film makers and editors.

With $3.81 per share in cash and equivalents, the stock seems to enjoy more support than warranted by the dramatic erosion in profit in the last year and continuing uncertainty about the restructuring.

Avid's earnings per share are expected to plunge from $1.26 to five cents this year ending December, and then rebound to 68 cents next year. That's assuming someone figures out how to stem the losses to Apple and, perhaps, make some of its products for consumers turn a profit.

On the way to a $20 share price, many investors have lost faith.

"When Blum Capital came in, I thought, there's some pretty smart money coming into the stock," says one sell-side analyst, who declined to be identified. "But three years later, I don't think they [Blum] know anything anyone else doesn't."

Avid did not respond to Barron's Online's request for comment at press time nor did Blum Capital. Top shareholders, including Capital Research Global Investors, the biggest buyer in the March quarter, declined to comment for this article.

At a Glance Avid Technology

Stock Price:

$19.63

52-Wk High:

$38.34

52-Wk Low:

$17.61

Market Cap:

$726.45 million

Est. 2008 EPS:

$0.05

2008 P/E:

392.6x

Est. Long-Term EPS Growth:*

12%

Est. ('08/'07) EPS Growth:

-96%

Revenue (trailing 12 months):

$909 million

Dividend Yield:

None

Chief Executive:

Gary Greenfield

Headquarters:

Tewksbury, Mass.

* Based on analyst estimates looking ahead three to five years.

Source: Thomson Reuters

Avid's profit erosion is a far cry from what Barron's magazine expected when writing positively about the stock back on Sept. 5, 2005 (see "Lights! Camera! Profits!").

Back then, the company had just paid $208 million to acquire Pinnacle Systems, a maker of consumer-grade video- and audio-editing tools, lessening its dependence on professional software and equipment for Hollywood and broadcast news.

Profits, however, never materialized, as the consumer business has posted losses quarter by quarter ever since.

Avid's most recent dilemma was the Hollywood writers' strike, which affected sales of video-editing/production equipment. But Avid also has badly missed new product deadlines, amid talk about making "strategic changes" to its wares.

Nearly a year after bringing in consultants Bain & Co., though, Avid continues to drift. "It's a guessing game," is what one analyst recently said of the company's business.

Ominously, after putting in a new CEO in December and announcing an earnings forecast well below expectations in January, the company in April said it would no longer provide quarterly financial forecasts pending its "in-depth strategic review," with some expectation for "several changes to Avid" that would "influence the longer-term financial model."

In the meantime, the company has made some dubious choices to resuscitate its stock, including spending down its cash balance by $74 million, to $150 million, in the March-ending quarter to buy back shares -- shares that have since lost about 19% of their value.

"The likelihood Pinnacle is no longer part of Avid in the next year is greater than 50%," says Piper Jaffray analyst Michael Olson.

Most important, however, is how drastically the company's status has slipped among both long-time customers and today's rising crop of film makers.

"It's as if a good friend is expiring," says Jon Alpert, an Emmy award-winning documentary film maker, who used Avid computers to produce shows for HBO such as 2006's Baghdad ER. Avid has done much to further community television, and "it's a pity they don't seem like they will be around much longer," adds Alpert.

Describing himself as an early adopter of Avid, Jon Alpert has since switched to using Apple's Final Cut Pro. Systems that would cost $80,000 to put together from Avid can be had for a few thousand dollars with Apple's Macs and its ever-expanding array of products.

"It is really, increasingly, financial suicide to consider using Avid," when the same work can be done with Apple gear, he says.

Alpert's color-correction expert, who "swore he'd never switch to Apple," this year made the transition to Apple's program, dubbed "Color," with relative ease and is now "quite happy."

Worse, film and TV's next generation is growing up on Apple's cheaper platform.

Alicia Dwyer, an independent film maker in Los Angeles who helped edit the Academy Award-winning Into the Arms of Strangers, is using Apple software exclusively for work on an upcoming PBS documentary. Chief among the inducements for Dwyer was the ability to take Apple's software on a laptop, an offering that Avid was late on.

Avid still has fans, but the devotion gap, if you will, has narrowed substantially with Apple. A recent survey conducted by Piper's Olson of 112 post-production video specialists found 45% using Avid machines and 41% using Apple, with the latter having jumped from 32% just a year ago.

That 45% signals continued goodwill for Avid, but even among the die-hards, there are gripes.

"Apple's stuff is vastly inferior to Avid's," says Joel Plotch, an L.A.-based editor responsible for numerous feature films from director Neil LaBute, such as The Shape of Things, among others, and who owns Avid equipment and also regularly rents it for jobs.

Plotch can tick off numerous technical limitations in Apple's Final Cut Pro, but he also thinks Avid needs to bring its prices down.

Avid on Monday unveiled upgrades to its hardware and software that reduced the price on some systems by as much as 25%. The company's editing software, which can be used on a Mac, is offered for $2,500, which "positions Avid to better defend against share loss to Apple's Final Cut Pro," in the words of J.P. Morgan Securities analyst Paul Coster.

Nevertheless, with Apple increasingly winning converts, it's unclear whether a few price cuts can turn the tide. Like anyone else who uses computers, those who get used to -- and invest in -- an Apple system may be disinclined to go back.

Something more drastic may be needed. Avid will be "basically starting at zero," says Piper's Olson, when the company unveils its reorg next month.

"It's going to take a year and a half to get there," wherever there is, says Canaccord Adams analyst Steve Frankel, referring to the turnaround.

Like Heaven's Gate, that saga could prove too long for investors' patience.

Full Disclosure

Blum Capital Partners bought 1.27 million shares of Avid Technology during the three months ended May 16, 2008, for a total of 8.1 million shares, according to the firm's most recent filing with the Securities and Exchange Commission.

Capital Research Global Investors bought 2.55 million shares of Avid Technology stock during the three months ended March 31, for a total of 2.76 million shares, or 7.5% of the stock, according to the firm's most recent filing with the Securities and Exchange Commission.

Michael Olson with Piper Jaffray has a Neutral rating on shares of Avid Technology and a 12-month price target of $23.

Steven Frankel with Canaccord Adams has a Hold rating on shares of Avid Technology and a 12-month price target of $25.

Paul Coster with J.P. Morgan Securities has an Underweight rating on shares of Avid Technology, and no price target set for the stock, according to a document from JP Morgan dated June 9, 2008.

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